32 / British Airways 2008/09 Annual Report and Accounts

Principal risks and uncertainties

The Group carries out
detailed risk management
reviews to ensure that
the risks are mitigated
where possible.

The operational complexities inherent

in our business, together with the highly
regulated and commercially competitive
environment of the airline industry, leave
us exposed to a number of risks. Many
of these risks for example changes in
governmental regulation, acts of terrorism,
pandemics and the availability of funding
from the financial markets can be
mitigated to a certain degree but remain
outside of our control.
The directors of the Group believe that
the risks and uncertainties described
below are the ones that could have the
most significant impact on the long-term
value of British Airways. The list (presented
in alphabetical order) is not intended to
be exhaustive.
The Group carries out detailed risk
management reviews to ensure that the
risks are mitigated where possible. A more
detailed summary of risk management and
internal control corporate governance
processes are included on pages 58 and
59. Clear plans for mitigating many of our
principal risks and uncertainties that we
face are included in the section on Our
strategy and objectives and The way we
run our business on pages 24 to 28 and
pages 34 to 52 respectively.
Brand reputation
Our brand is of significant commercial
value. Erosion of the brand, through either
a single event, or series of events, could
adversely impact our leadership position
with customers and ultimately affect our
future revenue and profitability.
Competition
The markets in which we operate are highly
competitive. We face direct competition
from other airlines on our routes, as well as
from indirect flights, charter services and
from other modes of transport. Some
competitors have cost structures that are
lower than ours or have other competitive
advantages such as being supported by
government intervention.

Fare discounting by competitors has

historically had a negative effect on our
results because we are generally required
to respond to competitors fares to
maintain passenger traffic. A particular
threat in the current economic
environment is cash rich competitors
growing market share and acting irrationally
to force other airlines out of the market.
Consolidation/deregulation
As noted above, the airline industry
is fiercely competitive and will need
to rationalise to meet current market
conditions. This will involve further
airline failures and consolidation. As in
all consolidations, a merger with Iberia,
and the joint ATI application with Iberia
and American Airlines, would introduce
integration risks such as a failure to realise
planned benefits, brand erosion and other
execution risks.
Mergers and acquisitions amongst
competitors have the potential to
adversely affect our market position and
revenue. Certain markets in which we
operate remain regulated by governments,
in some instances controlling capacity
and/or restricting market entry. Relaxation
of such restrictions, whilst creating growth
opportunities for us, may have a negative
impact on our margins.
Debt funding
We carry substantial debt which will need
to be repaid or refinanced. Our ability to
finance ongoing operations, committed
aircraft orders and future fleet growth
plans may be affected by various factors
including financial market conditions.
Although most of our future capital
requirements are currently asset-related
and already financed, there can be no
assurance that aircraft will continue to
provide attractive security for lenders
in the future.
Employee relations
We have a large unionised workforce.
Collective bargaining takes place on a

British Airways 2008/09 Annual Report and Accounts / 33

Fuel supply
The infrastructure that provides jet fuel to
Heathrow is critical to the operation. Any
breakdown in this infrastructure and/or
contamination of the fuel supply will have
a significant operational impact.

Government intervention
The airline industry is becoming
increasingly regulated. The scope of such

Pensions
If the financial markets deteriorate
further, our pension deficit may increase,
impacting balance sheet liabilities, which
may in turn affect our ability to raise
additional funds.
Safety/security incident
The safety and security of our customers
and employees are fundamental values for
us. Failure to prevent or respond to a
major safety or security incident could
adversely impact our operations and
financial performance.

2,382

991

1,641

2,922

1,310
2007/08**

2006/07

2005/06

2008/09

Financial statements

Global economic slowdown/credit crunch

Our revenue is highly sensitive to economic
conditions in the markets in which we
operate. Further deterioration in the global
economy may have a material impact on
our financial position. The financial services
sector is one of our key customer segments
and continued difficulties in the banking
industry represent a significant risk to
our revenue.

Key supplier risk

We are dependent on suppliers for some
principal business processes. In the current
economic environment our suppliers are at
increased risk of business failure. The failure
of a key supplier may cause significant
disruption to our operation. We describe
the supplier risk in more detail on page 46.

*Restated for the adoption of IFRS.

** Restated for the adoption of
IFRIC 13 and 14.

Corporate governance

The Group is exposed to currency risk

on revenue, purchases and borrowings in
foreign currencies. The Group seeks to
reduce foreign exchange exposures arising
from transactions in various currencies
through a policy of matching, as far
as possible, receipts and payments in
each individual currency and selling the
surplus or buying the shortfall of its
currency obligations.

Heathrow operational constraints

Heathrow has no spare runway capacity
and operates on the same two runways
it had when it opened 60 years ago. As
a result, we are vulnerable to short-term
operational disruption and there is little
we can do to mitigate this. In February
2008, public consultation on the UK
Governments conclusion that its
environmental conditions could be met
to allow full use of these two runways and
the construction of a third, short runway,
ended. This expansion of the airport would
create extra capacity and reduce delays,
enabling Heathrow to compete more
effectively against European hubs such
as Paris, Amsterdam and Frankfurt.

Our business

Fuel price and currency fluctuation

We use approximately six million tonnes
of jet fuel a year. Volatility in the price of
oil and petroleum products can have a
material impact on our operating results.
This price risk is partially hedged through
the purchase of oil and petroleum
derivatives in forward markets which
can generate a profit or a loss.

UK Government plans to double APD

from 2010, and the European Union
Emissions Trading Scheme, may have
an adverse impact upon demand for air
travel and/or reduce the profit margin per
ticket. These taxes may also benefit our
competitors by reducing the relative cost
of doing business from their hubs.

Net debt
million

2004/05*

Environment
Failure to adopt an integrated
environmental strategy could lead to
deterioration in our reputation and a
consequential loss of revenue. An
increased focus on corporate responsibility
and a published emissions reduction target
will help deliver the refocused strategy.

regulation ranges from infrastructure

issues relating to slot capacity and route
flying rights, through to new environmental
and security requirements. Our ability
to both comply with, and influence
any changes in, these regulations is
key to maintaining our operational and
financial performance.

Overview

regular basis and a breakdown in

the bargaining process could disrupt
operations and adversely affect business
performance. Our continued effort to
reduce employment costs, through
increased productivity and competitive
wage awards, increases the risk in this area.